Max Financial Services stock offers opportunity for bottom-fishing

Firm addressing concerns over pledged shares, Axis Bank tie-up

The Max Financial Services stock has been under pressure for over a year, on concerns over pledged shares of promoters (over 78 per cent), and the distribution tie-up with Axis Bank. 

The latter accounts for around 55 per cent in terms of annual premium receipts. Since May 2017, the stock has dropped nearly 30 per cent, compared to a 33 per cent rise in the Sensex. 

Despite the concerns, the holding company of Max group’s life insurance business (holding 71.5 per cent in Max Life) reported healthy numbers for FY19, on Tuesday. This also enthused investors, with the stock gaining over 5 per cent. The valuation is still attractive, given the strong outlook.

According to analysts at SBICAP Securities, the huge valuation discount is unwarranted — which has factored in the worst with regards to uncertainties while ignoring the Max Life’s successful track record in long-term execution. Life insurers’ numbers are generally analysed by looking at the cumulative period in a financial year, and not merely on a quarterly basis.

The company clocked 22 per cent growth in annual premium equivalent (APE) in FY19, in line with analysts’ expectations.  Its value of new business (VNB) margin expanded by a sharp 150 bps to 21.7 per cent. Better product mix and improved persistency (shows customers’ stickiness) fuelled profitability. Proportion of high-margin protection business, such as term plans, rose 220 bps to 10 per cent. Analysts expect profitability gains to continue.

Besides the continued focus on protection business, the rising share of proprietary distribution channel should support margin gains and APE growth. 

The firm opened 128 offices in FY19, and own-channel sales now account for 30 per cent of the total APE, versus 27 per cent in the last financial year. 

Margins from own-channel sales will surpass banking channels (likely by FY22), says the firm, upon the ramp-up in scale. 

Nevertheless, the company remains confident of renewal of its distribution contract with Axis Bank beyond October 2021. 

Even on the issue of pledged shares, the management, during the analysts’ call on Wednesday, said the promoters are in talks to sell a part of their stake in healthcare business to bring down the pledge. 

With business fundamentals intact and concerns being addressed, long-term investors could bottom-fish.